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POLYTECHNIC UNIVERSITY OF THE PHILIPPINESCOLLEGE OF ACCOUNTANCYSta. Mesa, ManilaJunior Philippine Institute of AccountantsINSTRUCTIONS: Answer this material the way you want. Smile while answering thesequestions, smile keeps the stress away, and stress is the one which prevent you from answeringques...

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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES COLLEGE OF ACCOUNTANCY Sta. Mesa, Manila

Junior Philippine Institute of Accountants INSTRUCTIONS: Answer this material the way you want. Smile while answering these questions, smile keeps the stress away, and stress is the one which prevent you from answering questions correctly. So keep your smile, like this.  1. Mari Company’s December 31, 2011 unadjusted current assets and stockholders’ equity are as follows. Cash 500,000 Marketable equity securities (Including P 1,000,000 of Mari Common stock) 4,000,000 Trade accounts receivable 3,500,000 Inventories 1,000,000 Common Stock 5,000,000 Retained earnings 2,000,000 In its 2011 statement of changes in equity, the total amount of equity at December 31, 2011 is. a. 7,000,000 b. 8,000,000 c. 6,000,000 d. 9,000,000 C

5M+2M-1M

2. On January 1, 2011, Ward Corporation issued its 9% bonds in the face amount of P 2,000,000, which mature on January 1, 2011. The bonds were issued for P 1,878,000 to yield 10% resulting in bond discount of P 122,000. Ward uses the interest method of amortizing bond discount, interest is payable annually on December 31. At December 31, 2011, Ward’s unamortized bond discount should be a. P 114,200 b. P 104,000 c. P 103,220 d. P 102,000 A

1,878,000X1.1-(2MX9%)=1,885,800; 2,000,000-1,885,800=114,200 3. Fores Company has an agreement to pay its sales manager a bonus of 5% of the company’s earnings. The income for the year before bonus and tax is 5,000,000. Income tax rate is 32% of income after bonus. The bonus is computed after deduction for both bonus and tax. What is the amount of bonus for the year (round of to the nearest peso)? a. 250,000 b. 164,410 c. 241,780 d. 172,630

B

5%X(1-32%)=3.4%; 5MX3.4/(100+3.4)=164,410 4. On January 1, 2011, Doro Corporation granted an employee an option to purchase 3,000 shares of Doro’s P5 par value common stock at P20 per share. The option became exercisable on December 31, 2012, after the employee completed two years of service. The option was exercised on January 10, 2013. The market prices of stock were as follows: January 1, 2011 December 31, 2011

30 50

January 10, 2013 For 2011, Doro should recognize compensations expense of a. 45,000 b. 37,500 c. 15,000 C

45 d. 0

(50-20)X3,000/2 5. Ryan Company sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to unearned service contract revenue. This account had a balance of P720,000 at December 31, 2011 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of P180,000 at December 31, 2011. Outstanding service contracts at December 31, 2011 expires as follows: During 2012 150,000 During 2013 225,000 During 2014 100,000 What amount should be reported as unearned service contract revenue in Ryan’s December 31, 2011 balance sheet? a. 540,000 b. 475,000 c. 295,000 d. 245,000

B

150,000+225,000+100,000 6. On January 1, 2011, Ward Corporation issued it 9% bonds in face amount of P4,000,000, which mature on January 1, 2021. The bonds were issued for P3,756,000 to yield 10%, resulting in bond discount of P244,000. Ward uses the interest method of amortizing bond discount. Interest is payable annually on December 31. At December 2011, Ward’s unamortized bond discount should be a.228,400 b. 208,000 c. 206,440 d. 204,000

A

3,756,000X1.1-360,000=3,771,600; 4,000,000-3,771,600=228,400 7. On July 1, 2011, Alto Corporation declared a 1 for 5 reverse stock split, when the market value of stock was P100 per share. Prior to the split, alto had 10,000 shares of P10 par value common stock issued and outstanding. After the split, the par value of the stock is a. 10 b. 20 c. 50 d. 2

C

10X5 8. On December 31, 2011, XYZ Company showed stockholders equity of P4,000,000. During 2011, the stockholders equity was affected by:  An adjustment to retained earnings for overstatement of inventory on December 31, 2010 in the amount of P200,000.  Declared dividend of P400,000 of which P300,000 was paid in 2011.  The corporation’s common stock was split five for one.  Net income for 2011 amounted to P700,000.  The common stock balance of P3,000,000 remained unchanged during 2011. What was the retained earnings balance on January 1, 2011? a. 1,000,000 b. 900,000 c. 800,000 d. 500,000

B

4M-3M+200,000+400,000-700,000

9. Losses which are expected to arise from firm and non-cancellable commitments for the future purchase of inventory items, if material should be a. Recognized in the accounts by debiting loss on purchase commitments and crediting estimated liability for loss on purchase commitments b. Disclosed in the notes c. Ignored d. Charged to retained earnings A 10. A company acquired some of its own common shares at a price greater than both their par value and original issue price but less than their book value. The company uses the cost method of accounting for treasury stock. What is the impact of this acquisition on total stockholders’ equity (TSE), and the net book value (NBV) per common share? a. SE – decrease ; NBV – increase c. SE – decrease; NBV – decrease b. SE – increase ; NBV – decrease d. SE – increase; NBV - increase A 11. Long-term liabilities are distinguished from current liabilities on the basis of: a. Whether the liability is to be paid within the operating cycle or one year, whichever is longer. b. Whether the liability is to be paid out of current assets within the operating cycle or one year, whichever is longer. c. Whether the liability is to be paid within one year or less. d. Whether the liability is to be paid within the operating cycle of the business, if it is less than one year. B 12. A corporation had the following account balances on its December 31, year 1 (in 000’s): Common stock P1,000 Preferred stock 600 Premium on preferred stock 160 Reserve for future plant expansion 200 Unappropriated retained earnings 100 Bond sinking fund 80 Additional information (in 000’s): During the year, a P50 cash dividend on preferred stock and a P50 cash dividend on common stock were declared. At December 31, year 1, total stockholder’s equity is: a. P2,140 b. P2,060 c. P2,040 d. P1,940 C

1,000+600+160+200+100+80-50-50 13. A corporation was organized on January 1. At that time, 10,000 shares of common stock were sold and issued at P10,000 per share each P20,000 of the proceeds were used to purchase equipment. The corporation has promised to pay P2.00 per share in dividends during the year if income exceeded P40,000. As it turned out, income was P60,000. However, due to severe cash shortage, the corporation declared a scrip dividend rather than an immediate cash dividend. If no other

transaction occurred which would affect retained earnings, the corporation should report on December 31, retained earnings of: a. P160,000 b. P40,000 c. P60,000 d. P20,000 B

60,000-(2X10,000) 14. On Dec. 31, 2007, GOSSIP GIRL issued 5-year bonds with face value of P 1 million. The bonds carry a stated rate of 10 % and were sold at par. Interest is payable semiannually on Dec. 31. According to the provisions of the bond indenture, GOSSIP GIRL was to make annual deposit into a bond sinking fund (beginning Dec. 31, 2008) to accumulate the amounts necessary to retire the bonds at their maturity. On Dec. 31, 2011, all required interest payments and sinking fund payments due to date had been made on schedule. If the sinking fund assets are properly classified as noncurrent, how should the balance of bonds payable be classified on Dec. 31, 2011? A. Current liability C. Contra to long-term investments B. Noncurrent liability D. Deferred credit

B 15. A cable television company receives deposits from customers, which are refunded when service is terminated. The average customer stays with the company for eight years. How would these deposits be shown on financial statements? A. Operating revenue C. Paid-in capital B. Other revenue D. Liability D 16. When an entity breaches an undertaking under long-term loan agreement on or before the balance sheet date with the effect that the liability becomes payable on demand, the liability is classified as current A. When the lender has agreed after the balance sheet date and before issuance of financial statements not to demand payment as a consequence of the breach B. When the lender has agreed on or before the balance sheet date to provide a grace period for at least twelve months after balance sheet date within which to rectify the breach C. Under all circumstances D. When the lender has agreed to refinance on a long-term basis on or before balance sheet date and before issuance of financial statements A 17. It is a program that is planned and controlled by management, and materially changes either the scope of a business undertaken by an entity or the manner in which that business is conducted. A. Business plan C. Benefit plan B. Early retirement program D. Restructuring D 18. These are recognized as liabilities (assuming that a reliable estimate can be made) because they are present obligations and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. A. Trade payables C. Provisions B. Accruals D. Unearned revenue

C 19. It describes viability of outcome. A. Uncertainty B. Fortuitous event

C. D.

Calamity Risk

A 20. Provisions shall be reviewed at _____ and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision shall be reversed. Where discounting is used, the carrying amount of a provision increases in each period to reflect the passage of time. A. Each reporting dates C. Each interim date B. Each balance sheet date D. Each annual date B 21. What is the effect of split up? A. Increase in number of shares and increase in cost per share B. Decrease in number of shares and decrease in cost per share C. Increase in number of shares and decrease in cost per share D. Decrease in number of shares and increase in cost per share C 22. What is the effect of stock dividend of the same class? A. Increase in investment account and increase in cost per share B. Decrease in investment account and decrease in cost per share C. No effect on investment account but decrease in cost per share D. No effect on investment account but increase in cost per share C 23. Shares received in lieu of cash dividend are recorded as A Income at fair value of the shares received B. Income at par value of the shares received C. Income at the cash dividend that would have been received D. Stock dividends A 24. Cash received in lieu of stock dividends is accounted for as A. Dividend income B. Return of investment C. Partly dividend income and partly return of investment D. If the stock dividend are received and subsequently sold and gain or loss is recognized D 25. When stock dividends of different class are received. A. No formal entry is made but only a memorandum

B. C. D.

Cash is debited and dividend income is credited A new investment account is debited and dividend income is credited A new investment account is debited and the original investment account is credited

C 26. On Dec. 31, 2010, the liability section of TAN Co. balance sheet included bonds payable of P 10 million and unamortized premium on bonds payable of P 1,800,000. Further verification revealed that these bonds were issued on Dec. 31, 2009 and will become due on Dec. 31, 2019. Interest of 12% is payable on June 30, and Dec. 31 of each year. On Apr. 1, 2011, TAN retired P 4 million of these bonds at 97 plus accrued interest. The total amount of cash paid for the retirement of bonds on Apr. 1, 2011 was A. P 3,950,000 C. P 4,040,000 B. P 4,000,000 D. P 3,880,000 B

4MX97%+4MX12%X3/12 27. NGO Co. issued P 1 million, 12 % 20-year bonds at 102 plus accrued interest on Feb. 1, 2011. The bonds are dated Jan. 1, 2011 and pay interest semiannually every June 30 and December 31. The premium is to be amortized using effective interest method over the period during which the bonds are outstanding. Bond issue costs totaled P 50,000. The accrued interest on the bonds issuance date is __. A. P 10,000 B. P 20,000

A

C. D.

P 30,000 P 50,000

1MX12%X1/12 28. EMIL Co. has outstanding 7% 10-year, P 2,000,000 face value bond. The bond was originally sold to yield 6% annual interest. EMIL uses the effective interest method to amortize bond premium. On June 30, 2010, the carrying amount of the outstanding bond was P 2,100,000. What was the amount of unamortized premium on bond should EMIL Co. report in its June 30, 2011 balance sheet? A. P 86,000 C. P 126,000 B. P 114,000 D. P 140,000

A

2.1MX1.06-(2MX7%)-2M 29. The TESORO Co. launched a new sales promotional program on their milk products. Each box of milk has a special mark coupon. For every ten special mark coupons returned to the company, customers receive an attractive price. The company estimates that 40% of the special mark coupons reaching the consumer mart will not be redeemed. Additional information follows: Units Amount Sales of milk (in boxes) 3,000,000 P 3,600,000 Purchase of prizes by company 80,000 P 40,000 Prizes distributed to customers 42,000 At the end of the year, the company recognized a liability equal to the estimated cost of potential prizes outstanding. What is the amount of this liability? A. P 69,000 C. P 39,000 B. P 49,000 D. P 21,000

A

3MX60%/10X.5-21,000 30. JP Co. inaugurated a sales promotional campaign on July 31, 2011 in its desire to improve sales. The company placed a coupon redeemable for a premium in each box of oatmeal sold. Each premium costs the company P 20 and five coupons must be presented by a customer to receive a premium. The company estimated that only 70% of the coupons issued would be redeemed. For the five months ended Dec. 31, 2011, the following information is available:  Boxes of oatmeal sold P 400,000  Premiums purchased P 30,000  Coupons redeemed P 100,000 How much is the liability for premium claims outstanding at Dec. 31, 2011? A. P 720,000 C. P 1,800,000 B. P 1,020,000 D. P 3,600,000

A

(400,000X70%-100,000)/5X20

Nos. 33 and 34 pertain to the following: JUNIOR FINEST Co. grants to an employee the right to choose either 1,200 shares or a right to a cash payment equal to the value of 1,000 shares. The grant is conditional upon the completion of three years’ service. If the employee chooses the share alternative, the share must be held three years after the vesting date. At grant date, the JUNIOR FINEST’s share price is P 50 per share. At the end of years 1, 2 and 3, the share price is P 52, P 55 and P 60 respectively. The entity does not expect to pay dividends in the next three years. After taking into account the effects of the post-vesting transfer restrictions, the JUNIOR FINEST estimates that the grant date fair value of the share alternative is P 48 per share. 31. Compute for the amount to be recognized as compensation expense in Year 2? A. P 17,333 C. P 19,333 B. P 19,866 D. P 21,866 D

(1,200X48)-(1,000X50)=7600/3=2,533 (1,000X55X2/3)-(1,000X52X1/3)+2,533 32. Compute for the amount to be recognized as liability in Year 2? A. P 17,333 C. B. P 23,334 D.

C

P 19,333 P 19,866

(1,000X55X2/3)-(1,000X52X1/3) 33. MARVIN INC. introduced a new product that carries a 2-year warranty against defects. It estimates that warranty costs will be of 2% of sales in the year of sale and 3% of sales in the year following the year of sale. Sales in Year 1 and Year 2 were P5 million and P7 million, respectively. Actual costs of servicing warranty in Year 1 and 2 were P110,000 and P260,000, respectively. What provision for warranty costs must the MARVIN recognize in Year 2? A. P 260,000 C P 350,000 B. P 290,000 D. P 370,000

C

7MX(2%+3%)

34. LEOMAR ENTERPRISE issues 10-year bonds with a face value of P1 million, dated January 1, 2011 and bearing interest at an annual rate of 12% payable semiannually on January 1 and July. The full interest amount will be paid at each due date. The market rate of interest on bonds of similar risk and maturity, with the same schedule of interest payments is also 12%. If the bonds are issued on February 1, 2011, the amount LEOMAR receives from the buyers of the bonds on that date is __. A. P 990,000 C P 1,010,000. B. P 1,000,000 D. P 1,020,000 C

1MX12%X1/12+1M 35. At December 31, 2008, an VELEZ Corporation had the following obligations that were expected to be refinanced: 17% note payable 15% note payable

P 140,000 P 200,000

The 17% note payable was issued on October 1, 2010 and matures on July 1, 2012. The 15% note payable was issued on May 1, 2010 and matures on May 1, 2012. On February 1, 2012, the entire P 140,000 balance of the 17% note payable was refinanced by issuance of a long-term debt instrument. On February 7, 2012, VELEZ entered a noncancelable agreement with a lender to refinance the 15% note payable on a long-term basis. The financial statements were authorized to be issued on March 1, 2012. The total amount of the obligations that may be properly excluded from current liabilities on LEOMAR’s December 31, 2011 balance sheet is __. A. P 0 C P 200,000. B. P 140,000 D. P 340,000 A 36. JENNY LYN Company granted 10,000 share options to each of its five directors on Jan. 1, 2011. The options vest on Jan. 1, 2015. The fair value of each option on Jan. 1, 2011 is P 50 and it is anticipated that all of the shares will vest on Jan. 1, 2015. What will be the increase in expense and equity for the year ended Dec. 31, 2011? A. P 2,500,000 C. P 625,000 B. P 500,000 D. P 125,000 C

10,000X5X50/4

Nos. 39 and 40 pertain to the following: The capital accounts of GULINAO Co. on Dec. 31, 2010 were as follows: Preference Share, P20 par, 20,000 shares Share Premium-Preference Ordinary Share, P 80 par, 50,000 shares Share Premium-Ordinary Retained Earnings

P 400,000 P 160,000 P 4,000,000 P 600,000 P 360,000

During the year ending Dec. 31, 2011, the following summarizes the transactions affecting the shareholder’s equity:  Apr. 30 1,000 preference shares were retired at P 25 per share  June 15 2,000 shares of treasury shares were purchased as P 85 per share

  

June 30 July 31 Dec. 31

A 2-for-1 share split of the company’s ordinary share was declared 800 treasury shares were reissued at P 50 per share Net income for 2011 was P 900,000

37. What was the total shareholder’s equity on Dec. 31, 2011? A. P 6,294,000 C. P 6,265,000 B. P 6,270,000 D. P 5,520,000 C

400,000+160,000+4,000,000+600,000+360,000-(1,000X25)-(2,000X85)+(800X50)+900,000 38. How much was the remaining cost of treasury shares on Dec. 31, 2011? A. P 136,000 C. P 96,000 B. P 102,000 D. P 51,000

A

(2,000-800/2)X85 39. CLAIRE Company has granted 100 share appreciation rights to each of its 1,000 employees on Jan. 1, 2011. The management feels that as of Dec. 31, 2011, 90% of the awards will vest on Dec. 31, 2013. The fair value of each share appreciation right on Dec. 31, 2011 is P 10. What is the fair value of the liability for the appreciation rights on Dec. 31, 2011? A. P 1,000,000 C. P 300,000 B. P 900,000 D. P 450,000

C

100X1,000X10X90%/3 40. ESTEBAN Co. grants 100 share options to each of its 500 employees. Each grant is conditional upon the employee working for the entity over the next three years. ESTEBAN estimates that the fair value of each share option is P 15. On the basis of a weighted average probability, ESTEBAN estimates that 20%of employees will leave during the 3-year period a...